IP: Holding to a higher standard?

An industry standard code, or standard industry classification (SIC) code, is often a formal document that establishes uniform engineering or technical criteria, methods, processes and/or practices. Today, many companies, including health care, construction and transportation companies, are forced to use such codes or industry-standard reference numbers to receive governmental reimbursements or governmental approval to operate.

The difficulty is that many industry standards are developed privately or unilaterally by a corporation, trade union or trade association, and as such the standards themselves may be the subject of copyright protection. A company's use of these industry standards — even its creating software that allows its customers to use them — may unknowingly make it liable for copyright infringement.

To bring a claim for direct copyright infringement, a plaintiff must establish ownership of a valid copyright, and further, that the defendant copied protected elements of the copyrighted work. Ordinarily, ownership of a valid copyright is established by way of a copyright registration certificate and tends not to be the subject of much debate before the courts. Courts spend most of their time and effort analyzing the second element: Whether the defendant copied protectable elements of the plaintiff's copyrighted work. Absent evidence of direct copying, proof of infringement involves fact-based showings that the defendant had access to the plaintiff's work and that the parties' works are "substantially similar."

Assuming there is an act of direct infringement, contributory copyright infringement may be found when "One who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another." The knowledge requirement is objective and is satisfied where the defendant knows or has reason to know of the infringing activity. With respect to the materiality requirement, for example, the 9th Circuit has held that providing the site and facilities for known infringing activity is sufficiently material. It should be noted, however, that some courts have required the participation to be "substantial," finding that the mere fact that equipment or facilities may be used for copyright infringement is not determinative.

A defendant is vicariously liable for the actions of a primary copyright infringer where that defendant is adjudged to have had the right and ability to control the infringer's conduct and has been shown to receive a direct financial benefit from the infringement. Notably, knowledge of the infringing conduct is not a requirement. Vicarious copyright liability is an outgrowth of the concept of respondeat superior, which imposes liability on those with a sufficiently supervisory relationship to the direct infringer. Allocation of liability in vicarious copyright liability cases has developed from a historical distinction between the paradigmatic "dance hall operator" and "landlord" defendants. The dance hall operator is liable, while the landlord escapes liability, because the dance hall operator has the right and ability to supervise infringing conduct while the landlord does not.

Applying these principles to the hypothetical situation referenced above, it would appear that many of the industry standard creators could successfully prove that they own a valid copyright in their industry standard codes. The industry standard codes would most likely be considered "original works of authorship," which is the requirement for obtaining copyright protection. Even seemingly non-creative works such as computer code, for example, can obtain and will receive copyright protection. These claims would be strengthened even further if the entity that created them was able to obtain copyright registrations for them, which would act as prima facie evidence of the validity of the copyright in the industry standards.

This introduces additional complexity. For example, consider a circumstance wherein a third-party company posts on its computer servers an SIC code definition developed by another, or creates and posts on its interactive web site tool or utility that references or uses one or more industry standard codes to realize a business objective. Might this constitute copyright infringement? It may indeed. The placement of identical copies of industry standards developed by one company onto another company's servers would most likely be held to constitute a copy copyright owner's intellectual property that likely violates the copyright owner's exclusive right to protect the industry standards. Furthermore, even if that third party did not place or copy the industry standards onto its servers, by maintaining the servers and allowing third parties to do so, the third party would likely be considered liable for contributory and/or vicarious copyright infringement as referenced above.

How can your company avoid liability? First, your company can often take a license from the entity that created the industry standards. Nowadays, many of the industry standard-creating entities are using the industry standards that they create as revenue generators and want to license them to third parties that want to incorporate them into product or service offerings. Second, a company can try to negotiate agreements with its customers, wherein its customers accept all liability for and from the entity that created the industry standard, for the customer's use. However, such an agreement may not shield the third-party company entirely from liability because the entity that originated the industry standard could still arguably bring a contributory copyright infringement claim against it, arguing that the third party is creating and benefiting from the mechanism that is contributing to the alleged copyright infringement. In addition, as is often the risk with indemnification agreements, they are only as good as the entity issuing them. If a customer is small and has low enterprise value, its indemnification is unlikely to provide the protection a larger company desires. Allowing this smaller company to use the industry standards through your company's product or service may not be worth the risk.